Meet the world's first crowd sourced investment bank

Essentially, Jefferies& Co. has become the world's first crowd sourced investment bank - people tell them what assets or exposure on the balance sheet they're nervous about and Jefferies goes out and makes those changes.

Thanassis Stavrakis/AP/ File

A woman hangs a European Union flag at the residence of the Spanish Ambassador in Athens,in this file photo. The investment bank Jeffries & Co. is listening to its clients and selling off bad Europe-related assets, Brown argues.

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November 22, 2011

By Joshua M. BrownGuest blogger

I've been watching the drama happening with Jefferies & Co (aka JefCo) from afar these last few weeks and at this point, I'm just astonished at what's taken place. Essentially, the fall of MF Global led the witch hunt right to JefCo's door as The Street pondered which firm would be next to go down because of Euro debt exposure. Every three days a new rumor or datapoint about JefCo's exposure surfaced, which was then both refuted and reacted to by the bank.

Basically it looks like this, happening again and again:

1. Someone says Jefferies has too much exposure to Europe

2. Jefferies opens up its books to The Street to disprove this

3. Jefferies does even more selling/hedging of Euro-related assets

Rinse and repeat, over and over. And the stock continues to sell off no matter what they do or say. Essentially, Jefferies has become the world's first crowdsourced investment bank - people tell them what assets or exposure on the balance sheet they're nervous about and Jefferies goes out and makes those changes. It's remarkable!

According to my friend Lauren LaCapra at Reuters, the bank has gone from having relatively high net exposure to being almost short Euro debt in the last few weeks!

Nov 21 (Reuters) - Jefferies Group Inc said it has reduced its exposure to troubled European sovereign debt by another 50 percent, part of the investment bank's effort to restore investor confidence following MF Global Holdings Ltd's bankruptcy.

In a public letter on Monday, top Jefferies executives said the company has reduced gross exposure to debt of Greece, Ireland, Italy, Portugal and Spain by a total of nearly 75 percent since worries first surfaced in early November.

The bank now has a net short position of $134 million to those countries' bonds, meaning the bank will profit as bond values deteriorate. The exposure represents about 3.8 percent of shareholders' equity, they said.

"By now, everyone should recognize Jefferies is the firm with the least exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain of all of our major competitors,"

I can't imagine where this might end. If we ask Jefferies to tone down their Portugal risk and bring us a glass of water while they're at it, will they listen? It is similar to what we're seeing with the sovereign nations of Europe, where the bond market is telling the electorate which leaders need to be sent packing and when.

When i-banks are taking their balance sheet cues from how their stock and CDS prices look, you know you're in uncharted waters.